Since it was spun off from online marketplace eBay (NASDAQ:EBAY) in July 2015, PayPal (NASDAQ:PYPL) has consistently delivered the goods. This year has been no different, with PayPal stock gaining nearly 24% since this January’s opening price.
Over the years, I’ve generally taken a bullish stance on PYPL stock. As a digital-payments processor, PayPal has the distinct advantage of being indefinitely relevant. In recent years, we have witnessed the rise and surging interest in alternative payment vehicles, such as cryptocurrencies. More likely than not, this trend will continue to progress.
In addition, this underlining thesis behind PayPal stock aligns naturally with current behavioral trends. According to a Pew Research Center report, “Roughly three-in-ten U.S. adults (29%) say they make no purchases using cash during a typical week, up slightly from 24% in 2015.”
Interestingly, Pew noted that as income levels rise, so does eschewing cash for digital payments. Logically, this makes perfect sense. Those with higher income tend to have higher education levels, and therefore have access to new technologies. Given that saving time is more of a concern than saving money for more affluent individuals, they’re more willing to advantage digital payment solutions. Naturally, this benefits PYPL stock.
Not surprisingly, millennials love anything to do with digitalization. Since they represent the largest workforce in the U.S., the compass for PayPal stock is appropriately calibrated.
However, what is surprising is that older generations are also embracing the conveniences of digitalization. When I look at PYPL stock from a wide angle, the increasing adoption of alternative payments is what keeps me bullish.
That said, the third-quarter PayPal earnings report is around the corner, and that’s not necessarily great news.
Management Must Control the Narrative of the PayPal Earnings Report
On paper, the upcoming PayPal earnings report – scheduled for release after the close on Oct. 23 – should result in a per-share profitability beat. Going back to Q1 2016, the company at worst has met expectations for earnings per share.
This time around, covering analysts expect EPS to come in at 67 cents. This is firmly near the upper end of the estimate spectrum, which ranges from 52 cents to 71 cents. In the year-ago quarter, PYPL delivered an EPS of 58 cents. A 15.5% earnings lift year-over-year is well within reason relative to prior performances.
On the revenue front, consensus forecast pegs sales at $4.4 billion. As with earnings, analysts are incredibly optimistic for growth, with revenue estimates ranging from $4.2 billion to $4.4 billion.
But does all this mean that PayPal stock is an easy buy? Unfortunately, recent news items make the narrative severely complicated.
In a much-publicized fallout, PayPal dropped out of Facebook’s (NASDAQ:FB) Libra cryptocurrency project. Later, eBay, Stripe, Mastercard (NYSE:MA), Visa (NYSE:V), and Mercado Pago followed suit.
Also, in late September, PayPal announced Chinese government approval to buy a controlling stake in Gopay Information Technology. This groundbreaking event marks the first time a foreign entity has entered China’s payment services market.
But most critically, PayPal lost $228 million in Q3 because of its investment in Uber (NYSE:UBER), which has been nothing short of volatile.
Optically, these news items give the impression that PayPal is biting off more than it can chew. Plus, with its Uber losses, PYPL confirms that some of their bets probably won’t pan out for some time. Therefore, the PayPal earnings report in Q3 will be about more than the numbers; investors will look to management to re-instill confidence in a suddenly shaky organization.
It’s Time to Play the Tactical Game with PayPal Stock
Despite my belief in the longer-term picture for PYPL stock, I’ve got to look at reality. For the immediate time frame, the markets are bearish on shares. In this situation, the last thing I want to do is fight the tape.
Technically, PayPal stock has dropped below the 50-day and 200-day moving averages (DMAs), barometers for nearer-term and longer-term sentiment, respectively. I also believe it’s an important clue that the price action has stumbled at the 50 DMA in the past two months. Upside resistance is strong, which implies a future downward trajectory.
But even if PayPal stock absorbs a rough outing following Q3, I won’t take that as a net negative. Instead, it provides a “time capsule” opportunity for those who wanted to jump aboard but didn’t for whatever reason. Although the nearer-term picture is troublesome, the forward outlook is among the brightest in the tech space.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
